I am neutral on Apple (AAPL) as its strong recent performance momentum, overwhelming analyst optimism and formidable competitive advantages are offset by its bleak near-term growth prospects and valuation multiples, which look high relative to its historical averages.
Apple is the world leader in consumer electronics and is in fact one of the largest companies in the world. In addition to its dominant computer and telephone products, the company also has a thriving services business that consumers access through its variety of electronic devices. These services include Apple Music, iCloud, Apple Care and Apple TV+. The company is also known to be considering changing its business model to the iPhone to boost its recurring revenue, and it’s also rumored to be working on developing an electric vehicle.
In this article, I will outline several reasons why I am neutral on AAPL shares at their current prices.
Solid results in the second quarter
AAPL’s fiscal second quarter results were quite strong, with revenue up 9% year-over-year, driven by iPhone business growth of 6%, growth of 15 % of Mac sales, a 17% growth in services and the rest of its business grew by 12%. Of significant note is the continued strong growth momentum in the iPhone business, which is a good reflection of the company’s ability to innovate and create exciting new features while maintaining substantial pricing power. The company also successfully launched its new M1-powered MacBook Pro and now has more than 825 million paying members in its services business, representing growth of 40 million from the previous quarter alone.
While Apple’s track record, formidable brand power, scale, and competitive advantage-enhancing technological prowess are all very impressive, its near-term prospects are a bit less clear. The company faces numerous headwinds to further growth, including supply chain issues, a severe shortage of chips, and economic headwinds from COVID-19 in its China operations. Additionally, Apple has decided to suspend sales in Russia following its invasion of Ukraine.
While analysts still expect revenue, EBITDA and earnings per share growth to continue over the next half-decade, they are expected to be at a slower pace than previously experienced by the society. Moreover, due to the fact that the base of the company becomes more and more massive, it is more and more difficult to increase the income. With expected annualized earnings per share growth of 7.3% and expected annualized revenue growth of 5.4% through 2026, AAPL appears to continue to do well, but is unlikely to crush the market. as she has done in the past.
Stock price could be better
Although the company is truly one of the best in the world thanks to its competitive advantages, AAPL’s share price – while not massively overvalued – looks less compelling than the underlying company. .
Despite decent but not great expectations for its growth over the next half-decade, the forward dividend yield is just 0.7%. As a result, the growth rate of earnings per share, plus current yield, is only 8%, with the vast majority of that coming from growth, making the total return proposition quite muted here. On top of that, the normalized P/E ratio of 22.87x is well above its 10-year average of 16.91x and slightly above its five-year average of 21.25x, indicating that the stock may currently be overvalued.
Wall Street analysts – on the other hand – seem rather bullish on the stock. According to Wall Street analysts, AAPL has a Strong Buy analyst consensus based on 20 buy ratings, six hold ratings and no sell ratings over the past three months. Additionally, the analysts’ average AAPL price target of $188.80 puts the upside potential at 37.22%.
Summary and conclusions
AAPL is a very impressive company that has generated fantastic returns for shareholders over the year, while revolutionizing communications technology and consumer electronics along the way. The stock has also proven to be an excellent dividend producer and is also buying back shares in spades.
While its services business is currently driving much of its growth, the many headwinds the company is currently facing, combined with its stretched valuation multiple, mean that total returns for the foreseeable future could be dull.
Overall, the company remains one of the best in the world and its stock is very hard to bet. However, the valuation looks a bit stretched at the moment, so investors may want to wait for a pullback in the stock price before adding shares.
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